COURSE:

PRINCIPLES OF MICROECONOMICS

COURSE CODE:

PMI511S

TUTORIAL LETTER:

01/2016

DATE:

03/ 2016

Dear Student

Thank you for submitting your first assignment on time. It was our pleasure to mark it. If your marks are good, I hope this will motivate you to work even harder. If you are disappointed with your marks, please do not give up now. Remember you still have one assignment to try and make up for this.

At the same time we would like to remind you that by doing your assignment on your own, and not copying it from another will only be to your benefit in the coming exams. Remember to read thoroughly through the questions before answering, especially the multiple-choice questions. Always try to answer as completely as possible, provide all the facts. Don’t simply write down the answer, but show all your calculations. Avoid making unnecessary calculation mistakes and always write down the initial formula for any calculation. Use this opportunity to revise the questions in Assignment 1 with the memorandum in hand. Give attention to the remarks of the marker-tutor in your assignment book. If there is anything that you are still unsure of, do not hesitate to contact a market-tutor.

We hope to see you at the vacation school and we are looking forward to your next assignment.

Regards,

Ms. Elina Mwatondange Tel. +264 81 1283754 Email: [email protected]

1

Principles of Microeconomics PMI511S 2016

ASSIGNMENT 1

SECTION A Instruction: Please use the answer sheet at the end of this tutorial letter. alternative you select with an X.

Cross the

1. c 2. c 3. a 4. b 5. c 6. d 7. b 8. c 9. b 10. a 11. d 12. c 13. b 14. a 15. d 16. a 17. a 18. d 19. c 20. a (20 marks) 2

SECTION B PLEASE START EACH QUESTION ON A NEW CLEAN PAGE. QUESTION 1 [10 marks]

Study the diagram in Figure 1 showing a production possibilities curve ( PPC) for military goods and consumer goods and answer the questions that follow.

Figure 1 Production possibilities curve

(a) If this country produced only military goods, how many would it be able to produce? (2) 160 military goods. (b) What is the opportunity cost of producing 40 billions of consumer goods? (2) 160-140=20 military goods (c) What is the opportunity cost of producing 80 billions of consumer goods? (2) 3

140 - 80=60 military goods (d) Based on your answers to questions (b) and (c) above, what ‘law’ regarding opportunity cost holds when you produce more and more of a good? (2) Law of increasing opportunity cost (e) If there is economic growth, what would happen to the PPC? (2) The PPC will shift outward to the right

4

QUESTION 2 [10 marks]

Consider the market for cement. Use demand and supply diagrams to illustrate and explain how the equilibrium price and quantity would change if the following things happen, ceteris paribus:

(a) Wooden houses, rather than those built with brick and mortar, become fashionable. (5)

The market is in equilibrium at price P1 and quantity Q1. The demand curve is D1 and the supply curve is S1. ●

If wooden houses become fashionable, there will be a decrease in demand for

bricks houses. ●

The demand curve will shift to the left.

●

Equilibrium price will decrease p2.

●

Equilibrium quantity will decrease Q2.

Three marks for the graph and 2 marks for explanation.

5

(b) The price of diesel increases (because cement is bulky, transport is an important cost component.

3 Marks for the graph and 2 marks for the description. The market is in equilibrium at price P1 and quantity Q1. The demand curve is D1 and the supply curve is S1. ●

An increase in the price of diesel (production cost) will shift the supply curve upwards to the left. The new supply curve is S2.

●

The equilibrium price will increase P2 and the equilibrium quantity will

decreaseQ2

6

QUESTION 3

[10 marks]

(a) The price of fish increases from N$ 24 to N$ 27 per kilogram and the quantity demanded decreases from 1000 kg to 950 kg per day. (i) What is the price elasticity of demand for fish for this price range, based on the arc (midpoint) elasticity formula? (Midpoint) elasticity (4) ∆Q 50 -------------------------(Q1 + Q2)/2 (1000 + 950)/2 Ed = ---------------- = ----------------∆P 3 -----------------------------(P1 + P2)/2 (24 + 27)/2

50 -----975 0.05128205128 = ------ = ----------------------- = 0.44 3 0.1176470588 -----25.5

(ii) Is demand elastic, unit elastic or inelastic?

(1)

Inelastic

(iii) Calculate the total revenue that fish producers receive from fish before the price increase and after the price increase. (3) 24x1000=N$ 24000 27x950=N$25650

(b) Draw supply curve that depicts perfectly inelastic supply.

7

(2)